Research Dept. News
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Monthly Report, num 344 - March 2011
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Executive summary
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Rising commodity prices threaten the global recovery
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Global growth consolidates early on in 2011...
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The growth of the world's economy consolidated early on in 2011, continuing the trend recorded at the end of last year. Indicators for this year are still few and far between and, in some cases, have been slanted by January's peculiar weather. However, they clearly point towards a consolidation of companies' good performance. The emerging countries are driving world demand and advanced economies are taking advantage of this, although their domestic demand is still weak in general and, in some cases, the withdrawal of fiscal stimuli is not promoting greater dynamism.
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...but the rise in commodities and particularly oil prices is causing concern.
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The dark side of this recovery is made up of price tensions resulting from a much higher rise in commodity prices than expected. Global activity itself is pushing up prices in these markets, which started from very low levels in 2009. But the tension caused by disturbances in the Arab world, such as Tunisia, Egypt, Bahrain and particularly Libya, has been added to these pressures. Libya is an exporter of hydrocarbons and the violent situation that has erupted in the country has made oil prices rocket up to 120 dollars per barrel, three times the minimum at the end of 2008. This is probably a transitory episode but apprehension is high, particularly when thoughts go back to the record high of 147 dollars per barrel reached in July 2008, just before the start of the great recession.
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Rising commodity prices within a context of recovery allows firms to pass on higher costs to the end product and this seems to be starting to occur, given the results of the surveys carried out directly on companies. This has therefore complicated the management of central banks as the main developed economies are still operating under the premise of lax monetary policy that resulted from the recent recession. But now the risks are shifting more towards tensions of growth and possible inflation. In emerging economies, most of the central banks adopted more restrictive monetary policies months ago, raising their official interest rates.
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The United States prioritizes growth over adjusting its public sector imbalance.
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In any case, there are substantial differences between countries. In the United States, the budget proposed for the 2011 tax year by Obama's administration contains a deficit larger than 9% of gross domestic product (GDP) for the third year running. The necessary fiscal consolidation has therefore been left for the future and the priority is to bolster the improvement in activity. Entrepreneurs are optimistic: the business sentiment index of the Institute for Supply Management continued to pick up in January, both in manufacturing and services. Inflationary risks are not a worry: production capacity is still underused and the consumer price index (CPI) is contained. Neither are there any labour tensions: employment is improving, albeit very slowly. In January, the unemployment rate fell again to 9.0% but this improvement was due to the bad weather, which reduced the number of people actively looking for work and only 36,000 new jobs were created.
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The emerging countries are facing the dangers of their economies overheating.
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In China, the latest business indicators, corresponding to December, merely confirm the economy's vitality. Tensions in the prices of the basket of goods and housing have forced the central bank to continue adopting restrictive measures in their monetary policy. Although to a lesser degree, something similar is happening in Brazil, the other large emerging economy, with a progressive tightening up of the monetary policy within a context of activity overheating.
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In Europe, the engine is Germany, thanks to its solid export capacity and to the recovery in its domestic demand. In February, the business climate index of the Munich-based institute IFO was up for the ninth consecutive month and set a new record since the country reunified, confirming the good feelings of entrepreneurs. Consumers are also looking good, with car sales up 16.5% year-on-year in January. Consumption's progress is supported by the good labour market prospects, as in January the unemployment rate fell by one tenth of a percentage point to 7.4%. Inflation is tending to rise but core inflation, excluding energy and foods, is at 1%.
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German dynamism is spreading out to its neighbours.
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German dynamism is spreading out to its neighbours, as highlighted by the growth figures for the fourth quarter. Sweden, Finland and Poland exceeded Germany's rate of 4.0% year-on-year, immediately followed by Denmark, Czech Republic, Austria, Netherlands and Hungary. At the other extreme, Greece, Ireland and Romania posted negative rates. In spite of such disparities, the growth of the euro area, on average, stood at 2% in the last quarter of the year, a cruising speed that remained stable throughout most of the year.
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But while average growth has remained stable for the last few quarters, it's a very different story with inflation. In January, Eurostat's flash estimate gave a year-on-year rate of 2.4% in the euro area compared with 1.0% a year earlier. Several members of the European Central Bank (ECB) have stated that, in 2011, they expect inflation to remain above 2% year-on-year for a longer period than desired, before it moderates. Is the ECB's objective of price stability in danger? Its President has attempted to convey the message that this upswing is due to one particular phenomenon that does not alter the institution's strategy but everyone realizes the complexity of the decisions being made within a monetary union with such disparate growth rates and prices disturbingly on the rise.
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In any case, investors' expectations have shifted towards sooner and faster rises in the ECB reference rate, at 1% since May 2009. The 12-month Euribor rate has risen appreciably, reaching the levels of spring 2009. Over the coming months, we cannot rule out variability in interbank rates increasing even further, as the euro area's economic growth consolidates and the ECB's discourse becomes more combative with inflation, as a prelude to rises in the official interest rates in the second half of the year.
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Expectation increases that the ECB will raise interest rates soon.
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To further complicate the panorama, the sovereign debt crisis, although somewhat deactivated in February, has by no means been averted. The decisions taken at European Union summit held between 24 and 25 March will be very important, regarding the different aspects to coordinating economic policies and changes in the instruments created to tackle the crisis caused by the fiscal situation of several member states in the euro area.
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The Spanish economy closes 2010 with a decline of 0.1%.
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In Spain, GDP grew by 0.2% in the last quarter of 2010 compared with the third, placing the year-on-year rate at 0.6% and the drop in GDP for the year as a whole at 0.1%. The gradual progress made by the Spanish economy was therefore consolidated throughout 2010, but it is still at a relatively low level and its pace is slower than euro area as a whole. The data from the National Accounts system published by the National Institute of Statistics show that the gains in GDP in the last quarter of 2010 were thanks to exports, up five tenths of a percentage point. On the other hand, domestic demand fell by three tenths of a percentage point in the same quarter, in spite of improved household consumption. Nonetheless, domestic demand performed better because it reduced its negative contribution to growth by one tenth of a percentage point, down to -0.6 points. Exports increased their contribution to GDP by three tenths of a percentage point, up to 1.2 points.
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Exports played an important part, speeding up their rate of growth in year-on-year terms to 10.5%. It should be noted that, unlike the pattern seen in the last two years when the improvement occurred mainly due to a drop in imports, in 2010 the foreign sector's positive contribution was dominated by exports performing well. The better performance by foreign tourism is significant, with a large rise in the number of visitors and reversing the downward trend of the last two years.
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Jobs are still being lost and inflation is rising...
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The weak pulse of the recovery can be explained by the still negative trend in the labour market, although this deterioration is tending to disappear. In this respect, the trend in new employment registrations with Social Security is significant, down in January compared with the previous month by 223,143 people, although this becomes zero when seasonally adjusted. The seasonally adjusted monthly figures by sector show that services generated some jobs in January while industry and construction continued to lose jobs that month, although less sharply.
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The same fragility in domestic demand is reducing the risk of inflation but this has not stopped the CPI from climbing up to 3.3% in January, in year-on-year terms, compared with the 1.0% of January 2010. Higher prices for electricity, fuel, tobacco and, to a lesser extent, some components of food lie behind January's rise. The upswing in inflation observed in Spain in the last few months has been higher than the one recorded in the euro area, so that the inflation differential has gone from zero in December 2009 to 0.6 percentage points in January 2011.
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...but the increase in exports, as well as improved labour costs and productivity, restore faith in the recovery's solidity.
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In spite of this rise in inflation measured by consumer prices, the fact is that unit labour costs have fallen considerably and that productivity is growing at a notable pace. It's true that this is mainly due to labour market adjustments but it is also because wages have entered a phase of moderation which is helping to improve the competitiveness of Spain's industry. In short, the adjustment in the Spanish economy is on course, now supported by a foreign sector in expansion and a domestic demand that is slowly becoming more stable. These are the trends we expect throughout 2011, providing the prices for oil and the rest of commodities don't upset the apple cart.
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25 February 2011
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Chronology
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Agenda
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